MEXICO Law and Practice Contributed by: Roberto Cannizzo, Carlo Cannizzo, Stefano Amato and Mauricio Moreno-Rey, Cannizzo
3. Real Estate Finance 3.1 Financing Acquisitions of Commercial Real Estate Acquisitions of commercial real estate are generally financed by a loan facility whose terms and conditions will depend on the creditworthiness of the borrower and the collateral available. There are different financing options for the acquisition of large real estate portfolios or companies holding real estate. In addition to a loan facility with collateral (trusts, mortgage, pledge, etc), other options include acquiring the seller’s debts or swapping shares, depending on the transaction and the parties involved. 3.2 Typical Security Created by Commercial Investors A commercial real estate investor who is borrowing funds typically creates the securities requested by lenders. Lenders usually request mortgages, trusts, share and non-possessory pledges creating a secu - rity over the furniture, fixtures and equipment (FF&E). Cash deposits are also common, depending on the business. Lock boxes, trusts or other forms of cash control may also be requested by the lender. Depending on the nature and function of the real estate, the borrower may create reserves for maintenance, insurance and improvements. The most common equity financing provisions include the following: • equity financing – the amount of investment versus the participation percentage of the company’s equity; • access to the books and records; • reporting and covenants; • expected return for equity; • the right to appoint directors; and • investment restrictions, limiting the use of invested funds to certain projects or purposes.
2.10 Taxes Applicable to a Transaction If real estate is acquired through a direct purchase of assets, different taxes and fees must be paid, namely: • property acquisition tax, which is paid by the pur - chaser and varies depending on the state where the property is located – it is usually between 2% and 6%; • VAT on the value of the construction (unless it is a residence or lot), paid by the purchaser at a rate of 16%; and • income tax, paid by the seller and calculated on the net gains from the sale of the property. Certain deductions are available (ie, acquisition cost, construction, improvements and extensions, notary expenses and commissions). Finally, there are registration fees to be paid to the RPP and for obtaining certificates (no liens certifi - cates, no tax debts certificate, etc). When the seller is an individual or foreign tax resident, taxes are withheld by the notary public who formalises the transaction. If a purchase is performed through share acquisition, income tax should apply. 2.11 Legal Restrictions on Foreign Investors In principle, foreigners can acquire real estate in Mexi - co, with the exception of residential properties located within the restricted zone (100 km-wide strip along the border or 50 km-wide strip inland from the beaches). However, foreigners may participate with 100% of the equity of corporations, including in the restricted zone, provided the property will not be used for residential purposes. A foreigner can own property located in the restricted zone through a trust by holding beneficiary rights, which will grant to the beneficiary practically all the benefits of an owner.
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